• Wednesday, February 28, 2024
businessday logo

BusinessDay

Challenges of Nigerian pension industry and possible solutions (3)

businessday-icon

The introduction of guaranteed minimum pension (GMP) in section 84(1) of PRA 2014 is quite appropriate with the aim to reduce the risk of volatility of standard of living in retirement facing the pensioners. Conceptually, the determination of the GMP and investment strategies to meet accrued GMP liability requires an actuarial methodology.

Knowledge gap

The CPS has been characterized by general misconceptions and knowledge gap. The contributors (particularly employees with low financial literacy level) are either reluctant to contribute to the scheme due to lack of investment knowledge (many workers misunderstand investment returns, expenses, and how each investment vehicle works) or just because they are unaware of the benefits of such scheme.

Lack of professional advice

PFAs and insurance companies are misinforming newly retirees in order to gain undue patronage under the CPS (i.e., de-marketing each other) instead of allowing the retiring workers to freely choose their mode of withdrawing their benefits as required in section 7(1) of PRA 2014.

Thus, lack of professional advice on the choice of pension benefit options at retirement has led to more retirees still opting for programmed withdrawal (94,097 retirees) than life annuity (8,479 retirees) in February 2014. The PFAs have failed in their duty to enlighten the retirees professionally simply because the programmed withdrawal is a product of the PFAs (the preferred withdrawal option recommended) while the life annuity is a product of a licensed life insurance companies.

Furthermore, the lack of professional advice has also led to few workers make AVCs and this will affect their standard of living in retirement.

Provision of inadequate information

Section 55 (d) of PRA 2014 requires PFAs to provide regular information on investment strategy, market returns and other performance indicators to PENCOM and employees or beneficiaries of the retirement savings accounts and yet this is not fully complied with.

Possible solutions

There should be a regular awareness campaign/education to sensitize the RSA holders of the benefits of the CPS by PFAs and the PENCOM.

PENCOM should require independent financial advisers (IFAs) to advise the RSA holders at retirement date on the choice of benefit options. The advice to take either programmed withdrawal or life annuity should be based on individual circumstances in order to eliminate the asymmetric nature of retirees’ decision making process of being influenced by PFAs to buy more of a programmed withdrawal than a life annuity. Regulators should factor into the overall charges the cost of advice retirees received from IFAs.

Pension database

Lack of biometric database for RSA holders would not enable the take-off of the transfer window as specified in sections 13 and 14 of PRA 2014. The biometrics capturing project is aimed at ensuring the integrity of data by eliminating multiple registrations, a serious challenge to the pension industry.

Many RSA clients’ profiles on PFA biometric databases were outdated and also not complaint with Automated Finger Identification System (AFIS) standards and specifications. This makes it difficult for RSA holders to move their accounts from one PFA to another and/or also for PFAs to seamlessly treat transactions on such RSAs or communicate with RSA clients.

Section 23(e) of PRA 2014 mandates PENCOM to maintain a biometric database on contributors and retirees in a national data bank (NDB) domiciled in-house and verification exercise on the RSA clients’ national databank is carried out on a regular basis in addition to databases being kept by PFAs for the same clients. Stakeholders are worried about a possible information overload as a result of the multiple biometric and verification exercises that Nigerians were being forced to do (such as those conducted by National Identity Card Management Commission, bank verification, permanent voters card etc.).

Possible solutions

PENCOM should be able to link up with the PFAs databases from their data bank and aggregate to give it the desired security identification. The main concern is the verification of information which has been leveraged on the use of cards similar to permanent voters card (PVC). The possibility could be explored in the future to improve on the databank.

PENCOM database needs to be relevant, credible, reliable and appropriate for pension scheme management decisions making process as well as for actuarial computations which would require projections of economic and demographic factors. Therefore, actuarial inputs are necessary elements in the creation of such a database.

Risk management

Some pension operators face operational risks associated with receipt of contributions without appropriate schedule, litigations and non-funding of RSA by employers. All licensed pension fund operators are mandated to development, implement and maintain a sound and prudent risk management framework that comprises policies, procedures and processes, appropriate to nature, scale and complexity of their operations.

The overall objective of the risk management framework is to manage the risk of volatility of the standard of living (which could be measured in terms of replacement ratio or real income) that each employee can maintain in retirement by virtue of being a member of the CPS. Thus, the management of this risk is crucial and it is important that PFAs understand this message clearly.

Possible solutions

An actuarial advice would assist the Risk Management Committee (which is to be established by every PFA, as stated in section 78(2) of PRA 2014) in carrying out its functions. In particular, there is a role for the actuaries in projecting the range of pension benefits which could be reasonably and/or realistically expected to emerge from a given contribution rate, taking into account the investment funds selected.

Human capacity development

PENCOM has warned the PFAs and PFCs based on section 23(g) of PRA 2014 to desist from employing contract staff (or use of outsourced staff from third parties who are not properly trained) to perform critical functions such as: pension administration; benefits administration; fund management and accounting; settlement, as well as custodial services, in order to avoid fraudulent activities from third parties.

The regulator (PENCOM) should also have access to actuarial advice in order to be properly equipped to monitor and understand the financial and actuarial conditions of the CPS and pension operator (PFAs), in line with section 24(m) of PRA 2014.

Possible solutions

Pension operators should set aside sufficient funds from profits in order to invest more in the training of their employees. They need to develop a training programme/calendar on a yearly basis. Thus, indicating the training needs of the employees as well as ensuring that relevant courses are identified for each employee relating to their own areas of operation/expertise.

A well-trained workforce will help reduce the risk of potential errors, improved the service delivery that adequately meets the needs of clients and improve the morale of employees as he/she will have a sense of belonging, ultimately promote loyalty.

The importance of actuarial expertise required in the management and regulation of pension schemes whether DB or DC schemes cannot be overemphasized and thus, PENCOM should initiate/sponsor actuarial training programmes to solve the problem of dearth of actuaries, as their services are valuable for the management of both pension regimes  in Nigeria.

Conclusion

The key challenges facing the pension industry and the possible solutions highlighted above (if considered and implemented by all stakeholders) would form the basis for transforming the Nigeria pension industry to meet the expectation of pensioners and also contribute significantly to the nation’s economic development, leading to an increase in the  GDP.

Pius Apere